On July 24, Westinghouse Electric signed a deal to build four nuclear reactors in eastern China. The price tag on the deal is $8 billion. This is just one tiny piece of the puzzle. China plans to spend approximately $50 billion to build 30 nuclear reactors by 2020. This will increase its nuclear energy production by 40 gigawatts. That’s basically enough power to supply all of Spain with electricity. The growth in the nuclear market has resulted in a very large increase in the demand for yellowcake.

I’m not talking about the cake your grandmother brings to your birthday party, either. I am talking about refined uranium (U3 O8 ). The price of uranium has seen a kind of growth second to no other commodity, equity index, or virtually any other investment vehicle available. From 2003 to the present, the spot price of uranium went from $7 to $130 per pound without declining once. That’s a 1,700%-plus increase over a five-year span.

I’m here to tell you that this amazing price run is not over yet, not even close. In fact, this market is just barely starting to catch the public eye, but once it becomes mainstream, the uranium market will really take off.

Uranium: Supercycle

Uranium is the perfect case study for discussing the notion of a supercycle. A commodities supercycle refers to the extended periods of time when either supply exceeds demand, followed by demand exceeding supply, or vice versa. This cycle extends of a period of several years. Let me explain its relevance to uranium.

Most of the demand for uranium came from the U.S.’s and the USSR’s amassing nuclear warheads. After the fallout of the Cold War, and the incidents at Three Mile Island and Chernobyl, the demand for uranium plummeted. Nuclear power plants that were planned for production were canceled at a very rapid pace. And to add further downward pressure, much of the demand that was still left was fulfilled by recycling old Soviet warheads, which is a process that goes on today.

For all of these reasons, the spot price of uranium slumped to a low of $6.50 per pound. Being that uranium miners’ revenues directly depend on the spot price of uranium, this drove the majority of them out of the market. This is the lag period when supply greatly overexceeded demand. In this case, it was fueled by a couple of extraneous factors.

Let’s fast-forward to 2003. The green energy movement is starting to take hold of the media, public, and Washington alike. Geopolitical tensions are making it essential that nations secure energy resources and become less dependent on politically unstable regions — especially the Middle East.

So nuclear energy is back, except there’s only one problem. There are very few uranium mines still in production, and exploration efforts are essentially nonexistent. It was around 2003 that we began to transition from excess supply to excess demand.

Time to get the shovels digging, the leach operations running, and the mills churning... That’s easier said than done — these processes take time.

An exploration company needs to be formed, and funds need to be raised. The company then needs to either lease or buy land for exploration. The next step involves using radiometric and magnetic survey equipment to prioritize potential exploratory drilling locations. Before any ground is broken, the company needs to obtain permits. This step might be the most underestimated as far as time consumption and difficulty are concerned. The inability of a company to obtain a permit is essentially the end of that company.

Assuming that the company does get its permits, it has to conduct numerous drilling tests. The test samples need to be treated with chemicals and then assessed for further testing. Again assuming that everything goes well with the drill tests, the company can go ahead and set up a mining operation, whether it be a leach setup or a more conventional mine. Infrastructure needs to be set up, and workers need to be brought in. During this whole process, time is ticking away. Once the ore has been removed from the earth, it needs to be transported to a mill for further processing. The product is eventually refined into the final product, U3 O8 .

Notice my use of the word “assuming.” Those are very big assumptions, and that’s why a very small minority of these companies actually make it to the production phase.

Just look at all of the places where a company could hit a dead end. Operating capital could dry up. There could be a failure to obtain permits. What if there’s no uranium on your property?

The production of these mines takes time and money. Even if everything goes well, you are talking at least six years until a mine becomes operational from initial exploration, and it’s for this reason that there is a long period of time during which demand exceeds supply. This shortage will always show up in price, and that’s exactly what we have and will continue to see. This has directly shown up in the supply and demand for yellowcake.

To be continued